For small businesses cash flow is king

Many small businesses seem to stumble from crisis to crisis as they strive to balance bills, paydays and receivables without a cash budget. Recognizing that new entrepreneurs and owners of rapidly growing small businesses need help in establishing an effective cash management system that makes every dollar count, accounting firms, law firms and banks are beginning to offer cash flow guidance.

“Generally, what I see in most in businesses, small and large, is a lot of them don’t do cash budgets,” Barry Worth, a CPA and turnaround specialist with Brown Smith Wallace LLC in St. Louis, Missouri told the St. Louis Business Journal. “So they don’t do cash forecasting to know when they will have some of the peaks and valleys.”

Many companies offer payment terms of 30 to 90 days to customers. At the same time these companies tend to pay their own bills as quickly as possible and don’t take advantage of terms allowing them to stretch out payments for 30, 60 or even 90 days. Of course some obligations, such as payroll, can’t be extended without serious and negative consequences.

“A lot of companies go broke by pushing product out the door to companies that don’t pay them, so it’s important to know your customers,” Craig Smith, a senior partner at Polsinelli Shalton Welte Suelthaus, told the St. Louis Business Journal.

Another tool that can help small businesses manage cash flow is treasury management. Traditionally, treasury management has thought of as something only big businesses do. Over the past decade, however, thanks largely to the Internet and consumer demand, banks have begun making it easier for small businesses to take advantage of treasury management services. The Check Clearing Act of the 21st Century passed in October 2004, allows paper checks to be converted into electronic checks for processing. Many businesses are also using electronic automated clearinghouse (ACH) documents to pay bills. Retail and service businesses are converting paper checks to ACH electronic documents at the point of sale as well. Perhaps the biggest use of automatic payments, however, is in the area of payroll, where automatic deposits from the company payroll account directly into employee accounts saves both time and helps reduce fraud.

John Spencer, senior vice president and manager of treasury services for Commerce Bank, advises small business customers to develop three scenarios to help them balance payments and revenues. First, develop a best case scenario in which cash is flowing in at a reliable rate and expenses are minimal. The second scenario is the middle of the road scenario in which the business has a reasonable expectation of cash coming in either through billings or the addition of new customers, and expenses, with one or two exceptions are reasonable. Finally, create a worst case scenario where no cash is coming in or anticipated and bills, including payroll are running higher than expected. Spencer also encourages small businesses to view their bank as a partner who can help them manage their cash flow and grow.

“Often times small business owners understand that they have a good product, but don’t have a financial background.” Spencer told the St. Louis Business Journal. “They might go out of business if the don’t understand cash flow. There are all kinds of statistics illustrating the number of businesses that have failed and the numbers are large because owners don’t seek the advice they should.”


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